The Other Oil Economy; Barrel Costs $30 but the Benefits Aren't Trickling Down

By RICHARD A. OPPEL Jr.

Published: February 19, 2000

DALLAS, Feb. 18—
Oil may not hold sway over the nation's economy the way it once did, but in places like Houma, La., it still, to a large degree, is the economy. Houma, 50 miles southwest of New Orleans, is a major center for oil drilling and oil field services -- the work of helping oil giants like Exxon Mobil find and produce oil.

So with oil prices surging, these should be boom times, right? Not necessarily. ''It's picked up to some degree, but it's definitely not reflecting $30-a-barrel oil,'' said Robert Bergeron, Houma's mayor, who spent 40 years in the oil business, starting as a roughneck. ''You hear more conversations about the positive future than any actual increase'' in activity.

Even as oil prices hover at the highest levels in nine years, pushed by OPEC production cuts and recovering global economic activity, companies plan only modest production increases.

Worldwide capital spending for exploration and production will rise no more than 10 to 15 percent from last year's depressed levels, according to several predictions.

''This is probably the longest sustained, dramatic upturn in price not followed by a dramatic upturn in investment,'' said Joseph A. Stanislaw, president of Cambridge Energy Research Associates, a research firm in Cambridge, Mass. ''It's a degree of caution that hasn't been seen in the industry before.''

The tepid spending means that oil-patch economies that rely on drilling and services, like parts of Louisiana, Texas and Oklahoma, are not getting the lift they normally do when prices rise.

''I probably don't answer any question as much as, 'Gee, with oil prices high, shouldn't we be seeing the economy and oil patch take off?,' '' said Timothy Ryan, dean of the University of New Orleans college of business. For us, it's the worst of all worlds. We end up with high crude oil prices, and high gasoline, but we don't get the positive effects that at least some states get from the boost in the economy that generally results from high oil prices.''

Oil service stocks also reflect uncertainty about whether big oil companies will greatly increase capital spending soon. After OPEC announced production cuts last March, indexes that track the oil service industry nearly doubled in six months, as fears of cheap, $5-a-barrel oil evaporated. But lately oil service stocks have fluctuated wildly, only recently returning to their September highs, as investors try to figure out just how much the price surge will help. Yesterday, they fell sharply, along with the rest of the market.

There is always a lag between prices beginning to rise and companies committing greater sums to find more oil. But as large producers report their anticipated capital expenditures for this year, with some even disclosing decreases, many analysts and executives say the industry's muted reaction to this price spike is highly unusual.

A big reason is that a lot of companies appear unconvinced that oil can stay close to $30, the current price for crude, or even the low $20's. Their skepticism derives from a belief that OPEC cannot keep member nations from cheating on production limits for long when prices get this high. Moreover, pressure from the United States and other countries to lift output appears to be having some effect. On Thursday, the Saudi oil minister said oil should ideally trade between $20 and $25, while his counterpart in Venezuela said action needed to be taken to stabilize prices.

That would be good news for consumers squeezed by costly heating oil and gasoline. But even if OPEC decides at its March meeting to increase production, it could be too late to lower gas prices by summer, as inventories have fallen sharply in recent months.

Some analysts say that even if OPEC lifts production, oil prices could still rise. Philip K. Verleger, a senior adviser to the Brattle Group, an economic consulting firm in Cambridge, Mass., said $40 oil would still be feasible later this year if Iraq cut off its supply to protest United Nations sanctions. ''It's almost too late to avoid this impending dependence on Iraq, barring an economic slowdown,'' Mr. Verleger said.

And even if domestic oil producers reverse course and seek out new sources aggressively, it would not have much of an effect on world supply and demand anytime soon: Total domestic oil production is about 6 million barrels a day, out of more than 70 million worldwide.

Aside from skepticism about OPEC's resolve, other temporary factors have led oil companies to rein in spending, like the rapid pace of mergers forcing producers to focus on integrating newly bought companies.

But the restraint also has deeper reasons, analysts and industry executives say. Some producers, rethinking the growth-at-all-costs strategy, now preach ''capital discipline.''

That means giving careful consideration to options like debt repayment and stock buybacks. Investors, meanwhile, have shut off the flow of fresh capital to many exploration and production companies. And some producers say the huge recent price swings have shaken out many longtime drilling and service workers, leading to labor shortages.

All that could change quickly if oil prices keep rising, or if OPEC continues to curb production and the industry persuades itself that this time the cartel can keep its members from cheating.